This Essay argues that our understanding of the reasonable person in economic transactions should take into account an individual’s race, gender, or other group-based identity characteristics – not necessarily because persons differ on account of those characteristics, but because of how those characteristics influence the situations a person must negotiate. That is, individuals’ social identities constitute features not just of themselves, but also of the situations they inhabit. In economic transactions that involve social interaction, such as face-to-face negotiations, the actor’s race, gender, or other social identity can affect both an individual actor and those who interact with him or her, because those characteristics often create expectations, based largely on group-based stereotypes, that influence the parties on both sides of the transaction. Individuals’ social identities thereby can influence their constraints and incentives, and accordingly their choices, behavior, and outcomes.

This Essay offers a couple of well-known examples of the influence of social stereotypes on individuals’ choices, behavior, and outcomes in economic transactions. It then provides a more extended examination of the effect of social identity on economic transactions by drawing upon a recent, growing, and fascinating area of social psychological research into the effect of gender on negotiations. The findings of this research are both disturbing and promising: disturbing because they show that stereotypes can influence the behavior of both women and men in negotiations, to the detriment of women, even if the individuals do not believe the stereotypes to be true, and that stereotypes can interact with other features of the situation to aggravate their tendency to promote unequal outcomes. The findings are promising as well, however, because they also show that gender stereotypes can be moderated or even counteracted by yet other features of the situation. Appreciating the situation-altering yet situation-sensitive influence of social identities such as gender provides us with a richer understanding of the circumstances in which people interact and shows that, sometimes, common economic transactions take place in different places for different people.